economic theory


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The answer seems obvious: falling productivity is due to a misallocation of capital:

 

LONDON – In all major economies, the so-called productivity puzzle continues to perplex economists and policymakers: output per hour is significantly lower than it would have been had the pre-2008 growth trend continued. The figures are stark, particularly so in the United Kingdom, but also across the OECD. And while it goes without saying that economists have many ingenious explanations to offer, none has yet proved persuasive enough to create a consensus.

According to the UK’s Office for National Statistics, output per hour in France was 14% lower in 2015 than it would have been had the previously normal trend growth rate been matched. Output was 9% lower in the United States and 8% lower in Germany, which has remained the top performer among developed economies, albeit only in relative terms. If this new, lower growth rate persists, by 2021 average incomes in the US will be 16% lower than they would have been had the US maintained the roughly 2% annual productivity gain experienced since 1945.

The UK exhibits a particularly chronic case of the syndrome. British productivity was 9% below the OECD average in 2007; by 2015, the gap had widened to 18%. Strikingly, UK productivity per hour is fully 35% below the German level, and 30% below that of the US. Even the French could produce the average British worker’s output in a week, and still take Friday off. It would seem that, in addition to the factors affecting all developed economies, the UK has particularly weak management.

Some contributing factors are generally acknowledged. During the crisis and its immediate aftermath, when banks’ efforts to rebuild capital constrained new lending, ultra-low interest rates kept some firms’ heads above water, and their managers retained employees, despite making a relatively low return.

On the other hand, new, more productive, and innovative firms found it hard to raise the capital they needed to grow, so they either did not expand, or did so by substituting labor for capital. In other words, low interest rates held productivity down by allowing heavily indebted zombie companies to survive for longer than they otherwise would have done.

The Bank of England has acknowledged that trade-off, estimating that productivity would have been 1-3% higher in the UK had it raised interest rates to pre-crisis levels in the recovery phase. But they believe the consequences – slower income growth and higher unemployment – would have been unacceptable.

This argument has now been extended beyond the banking system, to the capital markets themselves. Critics of central banks have claimed that a sustained policy of exceptionally low interest rates, reinforced by huge doses of quantitative easing, have caused asset prices to rise indiscriminately. That has not only had adverse consequences for the distribution of wealth; it has also muted the ability of capital markets to distinguish between productive, high-potential firms and others that deserve to fail. According to this view, a rising tide lifts even fundamentally unseaworthy boats.

This argument has some explanatory power, though it says little about the value added by highly paid asset managers and whether they really are prepared to put their money to work simply on the basis of a monetary-policy effect on relative prices, paying no attention to individual companies’ strategies and performance. But the key question the argument raises is what to do about it.

Would it really have been preferable to tighten policy far earlier, to kill off weaker companies in the interests of improving productivity? The BoE has given an explicit answer, and the other major central banks implicit answers, to that question. They do not think so.

A preferable approach to resolving the problem might be more vigorous use of the tools available to market regulators. These authorities tend to focus more on investor protection than on the allocational efficiency of the markets they oversee. Investor protection is important, of course, but as the Nobel laureate Eugene Fama put it, “the primary role of the capital market is allocation of ownership of the economy’s capital stock.”

A regulator focused on that objective would be especially rigorous in overseeing the transparent disclosure of information, and would seek to promote vigorous competition among companies and also, crucially for this objective, among investors. It should not be acceptable for asset managers to earn extravagant returns for following a market benchmark.

There are, no doubt, other dimensions to the productivity puzzle. Maybe we are not measuring output well. As developed economies become more service-based, our measures of output become less objective. In many service industries, outputs are effectively measured by inputs. Maybe we are not measuring enhancements in quality, which may mean that output increases are understated. Maybe we have reached a point at which the productivity boost from Internet-based technology has been cashed, and we need another technological leap to move forward again.

But one key challenge for central banks, as we edge toward the normalization of interest rates, will be to develop a framework for thinking about the impact of monetary policy on the allocation of capital. The task is urgent, as the social and political implications of a prolonged period of no productivity or real wage growth may be very serious. Indeed, arguably they have been factors behind the political upheavals in the US and the UK already.

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Because of the secular headwinds facing global economies, currently labeled as the “New Normal” or “Secular Stagnation”, investors have resorted to “making money with money” as opposed to old-fashioned capitalism when money and profits were made with capital investment in the real economy.

How is money made with money? Think of it simply as an extension of maturity and risk – all beginning with those $20 or maybe $100 bills in your purse or stashed safely in the cookie jar at home. Since cash yields nothing, and in fact depreciates in value day to day given even low 1%-2% inflation, savers/investors exchange cash for alternative choices involving less liquid, longer maturity, and in some cases more risky assets. A bank deposit that earns interest but offers ATM accessibility in measured amounts would be a first step. The available yield – more than 0% but hardly attractive given bank fees and the like – would be a first example of making money with available cash.

But capitalism, or should I say finance-based capitalism, requires more return in order to be profitable for its savers/investors. The next step, for individuals and institutions alike, might be a 6-month CD or a 90-day Treasury bill where yields suddenly approach 1% (at least in the U.S. In Euroland and Japan they are negative but that’s another story). But 1% will not pay the bills for most savers or financial institutions where investors demand compounding returns of 6%, 7% or 8% +, so alternative assets further out the risk/liquidity/maturity spectrum come into play. Corporate bonds, stocks, and private equity are legitimate extensions from non-yielding cash that are part of modern day finance-based capitalism. Savers/investors make money with their money (cash) as long as economies grow and inflation stays reasonably conservative. There is nothing new in all of this, but it helps to outline the fundamental process to understand why today’s economy is so different from that of decades ago and why it induces risks that were not present before.

Those differences and risks primarily are a result of secular headwinds whose effects are difficult to observe in the short run – much like global warming. “New Normal” high debt, aging demographics, and deglobalization along with technological displacement of labor are the primary culprits. Excessive debt/aging populations/trade-restrictive government policies and the increasing use of machines (robots) instead of people, create a counterforce to creative capitalism in the real economy, which worked quite well until the beginning of the 21st century. Investors in the real economy (not only large corporations but small businesses and startups) sense future headwinds that will thwart historic consumer demand and they therefore slow down investment. Productivity – which is the main driver of economic growth and long-term profits – slows down. Productivity in fact, in the U.S. and almost everywhere in the developed world has flat-lined for nearly five years now and has increased by only 1% annually since 2000 and the aftermath of the Dot-Com recession.

So instead of making money by investing in the real economy, savers/investors increasingly are steered toward making money in the financial economy – making money with money. And that, thanks to nearly $8 trillion of QE asset purchases from major central banks and the holding of short-term borrowing rates near zero or even negative, has made this secular shift in monetary policy extremely profitable. Bank margins have been lowered but their stocks and almost all other stocks have soared here in the U.S. and globally. Investors have discovered that making money with money is a profitable enterprise and have exchanged the support of central banks for the old-time religion of productivity growth as a driver of their strategy. The real economy has been usurped by the financial economy. Long live the financed-based economy!

But asset prices and their growth rates are ultimately dependent on the real economy and, the real economy’s growth rate is stunted by secular forces which monetary and even future fiscal policies seem unable to reverse. In fact, as I have mentioned many times in prior Investment Outlooks, monetary policy may now be a negative influence in terms of future economic growth. Zombie corporations are being kept alive as opposed to destroyed as with the Schumpeterian/Darwinian “survival of the fittest” capitalism of the 20th century. Standard business models forming capitalism’s foundation, such as insurance companies, pension funds, and banking, are threatened by the low yields that have in turn, produced high asset prices. These sectors in fact, have long-term maturities and durations of their liabilities, and their assets have not risen enough to cover prior guarantees, so we see Puerto Rico, Detroit, and perhaps Illinois in future years defaulting in one way or the other on their promises to constituents. Faulty finance-based capitalism supported by the increasingly destructive monetary policy begins to erode, not support the real economy.

So instead of making money by investing in the real economy, savers/investors increasingly are steered towards making money in the financial economy – making money with money.

My point in all of this is that making money with money is an inherently acceptable ingredient in historical capitalistic models, but ultimately it must then be channeled into the real economy to keep the cycle going. Capitalism’s arteries are now clogged or even blocked by secular forces which when combined with low/negative yielding “safe” assets promise to stunt U.S. and global growth far below historical norms. Ultimately investors must recognize this risk along with increasingly poorly hedged liabilities and low growth resulting from “New Normal” secular headwinds in developed economies. Add global warming to this list, and you have the potential for low asset returns in which the now successful strategy of “making money with money” is seriously threatened. How soon this takes place is of course the investor’s dilemma, and the policymakers’ conundrum. But don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk.

Money will currently be made, or at least conservatively preserved, by acknowledging the exhaustion of “making money with money”. Strategies involving risk reduction should ultimately outperform “faux” surefire winners generated by central bank printing of money. It’s the real economy that counts and global real economic growth is and should continue to be below par.

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In the article “Rapid money supply growth does not cause inflation” written by Richard Vague at the Institute for New Economic Thinking, December 2, 2016, the author argues that empirical evidence shows that increases in money supply has nothing to do with inflation. According to Vague,

Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.

Now Vague defines inflation as, three or five consecutive years of increases in the consumer price index (CPI) of 5% or more. Based on this he has concluded that an increase in the money supply does not cause inflation.

The main problem here is that inflation is not changes in prices but rather changes in money supply. The fact that Vague could not find strong correlation between increases in money supply M2 and changes in the CPI does not prove much.

To begin with the price of a good is the amount of dollars paid for the good. If the growth rate of money is 5% and the growth rate of goods is also 5% then there will not be any increase in the prices of goods. If one were to follow that inflation is the increase in the CPI then one will conclude that despite the increase in money supply by 5% inflation is 0%.

However, if we were to follow the definition that inflation is about increases in the money supply then we will conclude that inflation is 5%.

So how are we to decide about the correct definition of inflation? Is it about increases in the money supply or increases in prices?

The Essence of Inflation

The purpose of a definition is to present the essence, the distinguishing characteristic of the subject we are trying to identify. A definition is to tell us what the fundamentals of a particular entity are. To define a thing we need to go to the origin of how it has emerged.

Historically inflation originated when a country’s ruler such as the king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process the king would falsify the content of the gold coins by mixing it with some other metal and return diluted gold coins to the citizens. On this Rothbard wrote,

More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks,” but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.

On account of the dilution of the gold coins, the ruler could now mint a greater amount of coins and pocket for his own use the extra coins minted. What was now passing as a pure gold coin was in fact a diluted gold coin.

The increase in the number of coins brought about by the dilution of gold coins is what inflation is all about.

Note that what we have here is an inflation of coins, i.e., an expansion of coins. As a result of inflation, the ruler can engage in an exchange of nothing for something (he can engage in an act of diverting resources from citizens to himself).

Under the gold standard, the technique of abusing the medium of exchange became much more advanced through the issuance of paper money un-backed by gold. Inflation therefore means an increase in the amount of receipts for gold on account of receipts that are not backed by gold yet masquerade as the true representatives of money proper, gold.

The holder of un-backed receipts can now engage in an exchange of nothing for something. What we have is a situation where the issuers of the un-backed paper receipts divert real goods to themselves without making any contribution to the production of goods.

In the modern world money proper is no longer gold but rather paper money; hence inflation in this case is an increase in the stock of paper money.

Observe that we don’t say as monetarists are saying that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.

If we were to accept that inflation is increases in the money supply then we will reach the conclusion that inflation results in the diversion of real wealth from wealth generators toward the holders of newly printed money. We will also reach the conclusion that monetary pumping, i.e., inflation is bad news for the wealth generating process. No empirical study is required to confirm or to refute this.

As we have shown in the example at the beginning increases in the money supply need not always to be followed by general increases in prices. Prices are determined by both real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. In other words, while money growth is buoyant, prices might display low increases.

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Perhaps the most well-known concept, currently being tested on a small scale in places like Canada and Finland, is universal basic income. It’s a simple idea really: every citizen, regardless of employment or income, receives a periodic check from the government, enough to survive on, but nothing to write home about.

The premise is that by giving the entire society a financial cushion without strings attached, governments could save money by eliminating costly social programs like welfare and unemployment benefits, in addition to creating incentives for individuals to take risks, start businesses, change jobs, return to school or try a new career.

Rutger Bregman, a Dutch historian and basic income advocate, gave a talk on the subject at this year’s TED Talks conference and received a standing ovation.

“Poverty is not a lack of character. Poverty is a lack of cash,” he told the crowd. “People in poverty tend to eat less healthfully, save less money and do drugs more often because they don’t have their basic needs met.”

Davis, of Washington’s Everett Community College, is also a big proponent: “Most people would benefit,” he said, arguing it could spur entrepreneurship by giving middle-class households some financial breathing room to take risks they would otherwise spurn.

Still, critics of basic income point out that getting a check from the government may help, but it doesn’t come close to the sort of fulfillment that comes with having a job that allows individuals to fulfil their potential.

“Discussions about a guaranteed minimum wage are interesting and might work in some cases. But they are like giving the hungry food relief,” says Calestous Juma, a professor of international development at Harvard University’s John F. Kennedy School of Government. “Humans don’t exist to shop. They aspire to have purpose in life, to enhance their competence or mastery and express their individuality through autonomy and creativity. This suggests to me that broader access to emerging technologies would benefit society more than palliative guaranteed minimum wages.”

Here’s another sticking point for universal basic income: Why not give money to everyone, even the wealthy, and not just to those who need it? Advocates argue, not without reason given widespread support for universal programs like Medicare and Social Security, that targeted programs are easy targets for future elimination, exactly because they lack a broad-based backing. The other issue is that means-testing incurs a whole set of costs and social judgments that cloud the simplicity basic income is trying to avoid.

How exactly does this work?

Money is simply a construct that allows exchange. Exchange of what, exchange of produced goods and services. Rather than finding someone who has what you want/need and hoping that they need what you produce, money allows that exchange. Money in of itself has no other value.

Government cannot, unless it produces all goods and services in an economy, simply provide all persons with: housing, clothing, food, utilities, transport and luxuries. Even then, government requires capital to produce these goods and services.

This is essentially the communist model. All production in an economy is controlled/owned by the state. This has failed so often now, surely the lesson is learned.

The article seems to mix ‘universal basic income’ with some form of welfare payment. If that is what it is, then who is actually footing the bill? It will be those that still pay taxes. In which case, all you are arguing for is an expansion of the welfare state.

 

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To understand why, readers need only consider the 2nd stage result of any individual decision to save at the alleged expense of consumption.  If those who choose not to consume deposit the money in a bank, their decision to save powers consumption every bit as much as it would if they chose to spend every dollar in their control.  That’s the case given the basic truth that banks don’t pay for deposits so that they can stare lovingly at the dollars deposited.  If they did, hoarding banks would soon be insolvent, acquired by another bank, or both.

What this should remind readers is that no act of saving (short of hiding one’s extra disposable income in a safe) ever subtracts from consumption.  For an individual to save is for that individual to merely shift the ability to consume into the hands of someone else with near-term consumptive desires.

What this ideally indicates to readers is that production is all that matters when it comes to economic growth.  If we’re producing we’re consuming.  Simple as that.  The only non-question from there is whether we’re producing with an eye on our own near-term consumption, or with an eye on saving that will boost the consumption of others who access our savings.  It’s a non-question simply because it amounts to a distinction without a difference.

Applied to Lahart, correct analysis by the consumption-focused columnist would concern the removal of barriers to the very production that powers all demand.  If so, Lahart might note that taxes are a price or penalty placed on work that have the potential to shrink one’s desire to produce.  The columnist would also logically cast an eye toward regulations that don’t achieve much (see: banking, 2008), but that distract those engaged in the production of goods and services.

Taking this further, trade is the purpose of all production.  We produce so that we can get what we don’t have, so tariffs amount to a tax on the production that powers all consumption.  Lastly, Lahart might check the stability of the unit that facilitates consumption; in our case the dollar.  If it’s floating without definition, it’s less useful as a medium of exchange; thus rendering trade less likely.  In short, those desirous of more production would logically seek the reduction or removal of the tax, regulatory, trade and monetary barriers that lay a wet blanket on the production that is the source of all economic growth.

They should also ignore consumption simply because consuming is the easy part.  What we call an economy is just individuals producing with an eye on getting.  As human beings our wants are endless.  That’s why we produce in the first place.

Back to Lahart, his column assumes that if Americans just purchase enough cars, that the economy will be just fine.  He adds that if they don’t, the economy will be weak unless they “buy other things instead.” His analysis misses the essential 3rd stage result of saving; one that trumps the 2nd stage by a mile.

Interesting about all this is that while Lahart confidently asserts that the purchase of cars will power growth, he blithely ignores that we only have quality cars to buy thanks to the decision of producers long ago to forego consumption in favor of investment.  Lest we forget, no less than Wilbur Wright believed as the 20th century dawned that cars would never be broadly owned owing to their extreme unreliability.  In that case, thank goodness for savers.  As has been well documented in this column over the years, savers backed thousands of car companies in the early part of the 20th century that mostly failed.  But thanks to intrepid saving driven by production, what seemed impossible became a reality.

Notable here is that Wright was half of the Wright Brothers duo that disproved the consensus that man would never fly.  The Wrights luckily saved some of their earnings from a bike shop they owned, and their savings funded feverish experimentation which led to flight that, like the automobile, utterly transformed the global economy for the better.  What this ideally reminds readers is that when individuals produce with an eye on directing some of the fruits of their production into investment, technological advances that exponentially increase our productivity are the result.

Indeed, imagine what our economy would look like today if producers of the past had bought into Keynesian thinking only to spend all that they earned.  If so, the economy of today would be a slow-growth fraction of its abundant present.  We’re wildly productive today to the economy’s productive betterment precisely because producers delayed always easy consumption in favor of investment.

Of course, that’s why Justin Lahart’s commentary on the economy of the present is so disturbingly obtuse.  Limited in vision to less than the 1st stage of economic activity, he doesn’t see that his analysis in favor of rampant consumption, if followed, would author exponentially slower growth in the present and future thanks to reduced investment in the technological advances necessary for huge productivity increases.  Thanks to past savings in the 20th century, we now have the car, airplane, computer and internet in the 21st.  Unseen, assuming individuals actually abide Lahart’s analysis, is what we would lack to our extreme economic detriment in the 22nd century thanks to rampant spending limiting investment in new ideas in the 21st.

To say that consumption really doesn’t matter is ultimately to miss the much greater, booming growth point.  Consumption will always be evident so long as individuals are producing.  But if individuals continue to forego some or a lot of consumption in favor of investment, just imagine how much more advanced the U.S. economy will be in the future, and with this advance, just imagine how much more the hyper-productive of tomorrow will be able to consume.  In short, the answer to economic growth is to ignore the economists, along with the columnists who think like economists do.

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“The most effective way of making everybody serve the single system of ends toward which the social plan is directed is to make everybody believe in those ends. To make a totalitarian system function efficiently, it is not enough that everybody should be forced to work for the same ends. It is essential that the people should come to regard them as their own ends.”[p.171]

Berit’s comment: Ponder that statement. It helps explain the significance of universal service-learning. Like socialist youth in Nazi (National Socialism) and Communist countries, all must embrace the new ideology. Those who don’t — the intolerable dissenters — must be silenced. The next section elaborates:

“Although the beliefs must be chosen for the people and imposed upon them, they must become their beliefs, a generally accepted creed which makes the individuals as far as possible act spontaneously in the way the planner wants. If the feeling of oppression in totalitarian countries is in general much less acute than most people in liberal countries imagine, this is because the totalitarian governments succeed to a high degree in making people think as they want them to.”[p.171]

 The strategies that accomplish this mental change include numerous subtle and obvious forms of propaganda. Schools, the media, children- and youth-service teams, corporations, etc…. every source of propaganda must share the same vision. Though totalitarian, it will be designed to sound noble, compassionate and fair to all. Yet the result with be the exact opposite.

Ponder this warning from Dr. Thomas Sowell‘s review of Road to Serfdom:

 

“At the heart of the socialist vision is the notion that a compassionate society can create more humane living conditions for all through government ‘planning’ and control of the economy….

 

“The rule of law, on which freedom itself ultimately depends, is inherently incompatible with socialism. People who are free to do as they wish will not do as the economic planners wish. Differences in values and priories are enough to ensure that. These differences must be ironed out by propaganda or power, if socialism is to be socialism. Indoctrination must be part of the program, not because socialist want to be brainwashers, but because socialism requires brainwashing.

 

Idealist socialist create systems in which idealist are almost certain to lose and be superseded by those whose drive for power, and ruthlessness in achieving it, make them the “fittest” to survive under a system where government power is the ultimate prize.… The issue is not what anyone intends but what consequences are in fact likely to follow.”[39]

 

In his article, aptly titled “A Road to Hell Paved with Good Intentions,” Sowell points out that “Marxism as an ideal continues to flourish on American college campuses, as perhaps nowhere else in the world.” Collectivist visions appeal to academic idealists and others who ignore the lessons of history.

“….all propaganda serves the same goal—that all the instruments of propaganda are coordinated to influence the individuals in the same direction…. The skillful propagandist then has power to mold their minds in any direction he chooses, and even the most intelligent and independent people cannot entirely escape that influence if they are long isolated from all other sources of information. [p.171-172]

President Obama is now taking control of this change process by transferring workers from the private sector (corporations, private enterprise…) to the government service sector. With the controlled media on his side, the masses are not exposed to contrary facts.

“…even the striving for equality by means of a directed economy can result only in an officially enforced inequality—an authoritarian determination of the status of each individual in the new hierarchical order—and that most of the humanitarian elements of our morals, the respect for human life, for the weak, and for the individual generally, will disappear….

“The moral consequences of totalitarian propaganda which we must now consider are, however, of an even more profound kind. They are destructive of all morals because they undermine one of the foundations of all morals: the sense of and the respect for truth.

“…in order to induce people to accept the official values, these must be justified, or shown to be connected with the values already held by the people, which usually will involve assertions about causal connections between means and ends.  …people must be brought to agree not only with the ultimate aims but also with the views about the facts and possibilities on which the particular measures are based.[p.172]

Al Gore’s battle against a mythical man-made global warming crisis illustrates this point. Globalist change agents agree that a worldwide crisis is needed to persuade humanity to embrace all the costly restrictions and regulations of government controlled “sustainable development.” So they are willing to ignore facts and embrace myths and pseudo-science in order to reach their goal.

“We have seen that agreement on that complete ethical code, that all-comprehensive system of values which is implicit in an economic plan, does not exist in a free society but would have to be created….

“And while the planning authority will constantly have to decide issues on merits about which there exist no definite moral rules [apart from the Bible], it will have to justify its decisions to the people—or, at least, have somehow to make the people believe that they are the right decisions….

“This process of creating a ‘myth’ to justify his action need not be conscious. …  So [the totalitarian leader] will readily embrace theories which seem to provide a rational justification for the prejudices which he shares with many of his fellows. Thus a pseudoscientific theory becomes part of the official creed which to a greater or lesser degree directs everybody’s action. [p.173]

“The need for such official doctrines… has been clearly foreseen by the various theoreticians of the totalitarian system…. They are all necessarily based on particular views about facts which are thenelaborated into scientific theories in order to justify a preconceived opinion.

“The most effective way of making people accept the validity of the values they are to serve is to persuade them that they are really the same as those which they… have always held, but which were not properly understood or recognized…. The people are made to transfer their allegiance from the old gods to the new under the pretense that the new gods really are what their sound instinct had always told them but what before they had only dimly seen. And the most efficient technique to this end is to use the old words but change their meaning. Few traits of totalitarian regimes are … so characteristic of the whole intellectual climate as the complete perversion of language….

“The worst sufferer in this respect is, of course, the word ‘liberty.’ It is a word used as freely in totalitarian states as elsewhere…. Dr. Karl Mannheim… warns us that ‘a conception of freedom modeled on the preceding age is an obstacle to any real understanding of the problem. But his use of the word freedom is as misleading it is in the mouth of totalitarian politicians. Like their freedom, the ‘collective freedom‘ he offers us is not the freedom of the members of society but the unlimited freedom of the planner to do with society what he pleases….[pps.174-175]

“In this particular case the perversion of the meaning of the word has, of course, been well prepared …. by many of the theoreticians of socialism. But ‘freedom’ or ‘liberty’ are by no means the only words whose meaning has been changed into their opposites to make them serve as instruments of totalitarian propaganda. We have already seen how the same happens to ‘justice’ and “law,’ ‘right’ and ‘equality.’ The list could be extended until it includes almost all moral and political terms in general use.

“… the confusion becomes worse because this change of meaning of the words describing political ideals is not a single event but a continuous process, a technique employed consciously or unconsciously to direct the people….

“It is not difficult to deprive the great majority of independent thought. But the minority who will retain an inclination to criticize must also be silenced. … Since many parts of this code will never be explicitly stated… every act of the government, must become sacrosanct and exempt from criticism. If the people are to support the common effort without hesitation, they must be convinced that not only the end aimed at but also the means chosen are the right ones.”[p.175]

Facts and theories must thus become no less the object of an official doctrine than views about values. And the whole apparatus for spreading knowledge—the schools and the press, radio and motion picture—will be used exclusively of to spread those views which, whether true or false, will strengthen the belief in the rightness of the decisions taken by the authority; and all information that might cause doubt or hesitation will be withheld.”[p.176]

Stanford University Professor Steven Schneider illustrates it well. He said,

“On the one hand, as scientists, we are ethically bound to the scientific method, in effect promising to tell the truth, the whole truth, and nothing but–which means that we must include all the doubts, the caveats, the ifs, ands, and buts. On the other hand, we are not just scientists but human beings as well. And like most people, we’d like to see the world a better place, which in this context translates into our working to reduce the risk of potentially disastrous climatic change.
“To do that, we need to get some broad based support, to capture the public’s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements and make little mention of any doubts we might have… Each of us has to decide what the right balance is between being effective and being honest.” (See endnote #38 in Saving the Earth)

This applies even to fields apparently most remote from any political interests and particularly to all the sciences, even the most abstract. That in the disciplines dealing directly with human affairs and therefore most immediately affecting political views, such as history, law or economics, the disinterested search for truth cannot be allowed…. These disciplines have, indeed, in all totalitarian countries become the most fertile factories of the official myths which the rulers use to guide the minds and wills of their subjects….” [p.176]

n “Government religion in the United States,” Erica Carle wrote:
“The separation of church and state argument for removing all traces of Biblical teaching from public life and public land is a gigantic fraud. Why? Because there is no separation of church and state. Government religion is a fact in the United States. What is wanted by the government religion adherents is not separation of church and state, but exclusive rights for their religion.”What is the government religion? Auguste Comte (1798-1857), its French founder, called it the Religion of Humanity. The doctrines of the Positive Religion are now taught in the schools as a science which Comte called sociology. Sociology was to be the ruler science over all the other sciences and also the science of managing the world…. In a country that is supposed to be free,

  • its citizens are being subjected to sociological management,
  • its scientists and elected officials to sociological control, and
  • its youth to sociological education.

“…we must yet be on our a guard not to dismiss .[these aberrations] as mere accidental by-products which have nothing to do with the essential character of a planned or totalitarian system….They are a direct result of that same desire to see everything directed by a ‘unitary conception of the whole.’…

 

“Once science has to serve, not truth, but the interests of a class, a community or a state…. As the Nazi minister of justice has explained, the question which every new scientific theory must ask itself is: ‘Do I serve National Socialism for the greatest benefit of all?’
The word ‘truth’ itself ceases to have its old meaning.  …it becomes something to be laid down by authority, something which has to be believed in the interest of the unity of the organized effort and which may have to be altered as the exigencies of this organized effort require it.
“The general intellectual climate which this produces, the spirit of complete cynicism as regards truth which it engenders, the loss of the sense of even the meaning of truth, the disappearance of the spirit of independent inquiry…. Perhaps the most alarming fact is that contempt for intellectual liberty is not a thing which arises only once the totalitarian system is established but one which can be found everywhere among intellectuals who have embraced a collectivist faith and who are acclaimed as intellectual leaders even in countries still under a liberal regime.

 

“Not only is even the worst oppression condoned if it is committed in the name of socialism, and the creation of a totalitarian system openly advocated by people who pretend to speak for the scientists of liberal countries; intolerance, too, is openly extolled….” [p.178]

“This view is, of course, practically indistinguishable from the views which led the Nazis to the persecution of men of science, the burning of scientific books, and the systematic eradication of the intelligentsia of the subjected people.

“The desire to force upon the people a creed which is regarded as salutary for them is, of course, not a thing that is new or peculiar to our time. New, however, is the argument by which many of our intellectuals try to justify such attempts.” [p.179]
The tragedy of collectivist thought is that, while it starts out to make reason supreme, it ends by destroying reason….”[p.180]

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The pronunciation in English is lay-say-fair. Its French origins date back to the late Renaissance. As the story goes, it was first used about the year 1680, a time when the nation-state was on the rise throughout Europe. The French finance minister, Jean-Baptiste Colbert, asked a merchant named M. Le Gendre what the state could do to promote industry.

According to legend, the reply came: “Laissez-nous faire,” or “let it be.” This incident was reported in 1751 in the Journal Oeconomique by the free-trade champion Rene de Voyer, Marquis d’Argenson. The slogan was codified finally in the words of Vincent de Gournay: “Laissez-faire et laissez-passer, le monde va de lui même!” The loose translation: “Let it be and let goods pass; the world goes by itself.”

To generalize the principle: Leave the world alone, it manages itself.

A Simple, Beautiful Ideal

People should enjoy the liberty to manage their own lives, associate as they please, exchange with anyone and everyone.

All these renderings express not only the idea of free trade — a main subject of dispute in 18th-century European politics — but also a larger and more-beautiful vision of the way society can be permitted to work.This idea can be summed up in the phrase “laissez-faire,” or in the doctrine of what was once called simply liberalism, which today is clarified as classical liberalism. This idea is this: Society contains within itself the capacity for ordering and managing its own path of development. It follows that people should enjoy the liberty to manage their own lives, associate as they please, exchange with anyone and everyone, own and accumulate property and otherwise be unencumbered by state expansion into their lives.

In the centuries that have followed, millions of great thinkers and writers have elaborated on this core idea within all disciplines of the social science. Then as now, there stand two broad schools of thought: those who believe in state control of one or many aspects of the social order and those who believe that such attempts at control are counterproductive to the cause of prosperity, justice, peace and the building of the civilized life.

These two ways of thinking are different from what is called the Right and the Left today. The Left is inclined to think that if we let the economic sphere be free, the world will collapse, which advances some theory of the disaster that would befall us all without government control. The Right is similarly convinced that state control is necessary lest the world collapse into violent, warring, culture-destroying gangs.

The laissez-faire view rejects both views in favor of what Claude Frédéric Bastiat called “the harmony of interests” that make up the social order. It is the view that the artists, merchants, philanthropists, entrepreneurs and property owners — and not the cartelizing thugs with state power — ought to be permitted to drive the course of history.

This view is now held by millions of thinkers around the world. It is the most exciting intellectual movement today, and in places where we might least expect to find it.

The growth of the idea of laissez-faire in our times is infused with a digital energy. Distributed networks take the idea to a whole new level: no one in control but everyone in control, with no central point of failure.

But the idea itself is not new in world history.

Deep Roots

Though it is mostly associated with 18th-century British thought, it is a view of society that has much-deeper roots in the Christian Middle Ages and early Jewish thought. Nor is laissez-faire somehow a Western idea alone. The deepest roots of laissez-faire actually trace to ancient China, and even today, the thoughts of the masters offer a fine summary.

Here are some examples from non-Western thought:

Lao Tzu (6th century B.C.): “The more artificial taboos and restrictions there are in the world, the more the people are impoverished…The more that laws and regulations are given prominence, the more thieves and robbers there will be…”

“The Sage says: ‘I take no action, yet the people transform themselves, I favor quiescence and the people right themselves, I take no action and the people enrich themselves…’”

Chuang Tzu (369-286 B.C.): “I would rather roam and idle about in a muddy ditch, at my own amusement, than to be put under the restraints that the ruler would impose. I would never take any official service, and thereby I will [be free] to satisfy my own purposes….” The world “does simply not need governing; in fact, it should not be governed.”

Pao Ching-yen (4th century A.D.): “Where knights and hosts could not be assembled, there was no warfare afield…Ideas of using power for advantage had not yet burgeoned. Disaster and disorder did not occur…People munched their food and disported themselves; they were carefree and contented.”

The inviolability of property rights, the primacy of peace in world affairs and the centrality of free association and trade in the conduct of human affairs.

Ssu-ma Ch’ien (145-90 B.C.): “Each man has only to be left to utilize his own abilities and exert his strength to obtain what he wishes…When each person works away at his own occupation and delights in his own business, then like water flowing downward, goods will naturally flow ceaseless day and night without being summoned, and the people will produce commodities without having been asked.”These early beginnings of the idea began here but can be traced through thinkers of ancient Greece and Rome and through the Middle Ages, until the notion swept the world in the 18th and 19th centuries, giving rise to unheard-of prosperity, liberty and peace for all. In the 18th century and in large parts of the world (other than the English-speaking world), laissez-faire has been called liberalism or classical liberalism, a doctrine of social organization that can be summed up in the words of Lord Acton: Liberty is the highest political end of humankind.

20th Century Corruption

To be sure, the notion of liberalism was already corrupted early in the 20th century. As Ludwig von Mises wrote in his book Liberalism (1929), “The world today wants to hear no more of liberalism. Outside England, the term ‘liberalism’ is frankly proscribed. In England, there are, to be sure, still ‘liberals,’ but most of them are so in name only. In fact, they are rather moderate socialists. Everywhere today, political power is in the hands of the anti-liberal parties.”

That remains true today. And the revolt against this is often termed “libertarian,” a word that has long been associated with a primary concern for human liberty. It was a neologism for the postwar generation that was synonymous with liberalism. In current understanding, it refers to a tightening and radicalizing of the old liberal view. It asserts the inviolability of property rights, the primacy of peace in world affairs and the centrality of free association and trade in the conduct of human affairs.

It Can Exist

The state is on the march, but the resistance is growing.

Such a society is not historically unprecedented. Murray Rothbard wrote about Colonial America as an example of a wildly successful experiment of society without centralized state management. Medieval Europe made the first great economic revolution without recourse to the power of the nation-state. David Friedman has documented competitive legal orders in medieval Iceland. Other writers go so far as to say that given how we conduct our lives day to day, relying on the productivity of private institutions and associations, we never really leave a practical anarchy.As Mises says, liberalism/libertarianism/laissez-faire is not a completed doctrine. There are so many areas remaining to be explored and so many applications to make both in history and in our time. The most exciting books of our time are being written from the vantage point of human liberty. The state is on the march, but the resistance is growing.

It is a debilitating thing to watch the state push and push to gain more power, under the flags of Equality or Greatness or Security or Fairness, but it is a source of joy to know that ideas are more powerful than all the armies of the world. Reason, clarity, innovation, and relentless work for what is right and true will eventually lead the idea of laissez-faire to victory.

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